Even though the latest weekly Energy Information Administration oil storage figures showed the biggest build to inventories in the last 11-months, both the West Texas Intermediate and Brent oil benchmarks remain at elevated prices. Resurgent anxiety about rapidly dwindling onshore storage capacity was not enough to offset the drop in production.
According to the U.S. Department of Energy, total US output fell by -2.60% versus the prior year, with the figure slipping to the lowest levels since November of 2014 in a reflection of the looming threat of rising producer defaults and bankruptcies. However, despite the declining production in the United States, downstream refiners continue to operate at a breakneck pace that is well above levels recorded in the last 10 years as weaker US production is supplemented with growing imports. Onshore storage currently sits modestly over 500 million barrels according to data compiled by Genscape, rapidly approaching 80% of total inventory capacity. Cushing in particular has seen an additional 1.19 million barrels added last week alone, experiencing rising stockpiles in 16 of the last 17 weekly readings.
Even with declining US production boosting the price of crude oil over the near-term, other players in the global oil market threaten to tip prices once more. In spite of the widely congratulated oil output freeze agreed upon by Russia, Saudi Arabia and Venezuela, the void left by unconventional oil producers is rapidly being filled by Iran which boosted production by 500,000 barrels per day in February. Furthermore, the nation plans to raise production further in an effort to win back market share during the years of sanctions in an effort to restore its place in the increasingly competitive global energy landscape. The current WTI futures curve gives a strong indication that production is not set to fall in a demonstrable way, with oil prices not forecast to rise back above $50 per barrel before June 2023. With oil majors such as Exxon Mobil slashing capital expenditures, the stage is set for the next round of losses in oil prices despite falling US production. However, despite the output gap, overflowing inventories are likely to be the next driver of price weakness.
Rising U.S. Crude Inventories Fail to Dent Oil Prices
Market Trends - 03/03/2016